Econ 1101 - Final Prep
Suppose that all firms in a perfectly competitive industry are in a situation in which economic profits are greater than zero. What is likely to happen in the long run? A) All of these. B) The market supply curve shifts to the right, causing price to fall and total market output to increase. C) The market supply curve shifts to the left, causing price to rise and total market output to decrease. D) The market demand curve shifts to the right, causing price to rise and market output to increase. E) The market demand curve shifts to the left, causing price to fall and market output to decrease.
B
Suppose that there is a 10 percent increase in the price of a good, and as a result, the quantity supplied increases by 9 percent. From this information, you can say that A) supply is elastic. B) supply is inelastic. C) supply is unit elastic. D) the good is an inferior good. E) the good is a normal good.
B
Which of the following would cause a change in the quantity demanded of ski-lift tickets, but not a change in demand, holding all else constant? A) a change in tastes in favour of skiing B) an increase in the price of ski-lift tickets in response to a reduction in the supply of ski-lift tickets C) a rise in the price of ski boots and skis D) an increase in population E) a rise in average household income
B
What depends on evaluation of a oligopoly
(a) drives the firms away from the cooperative, profit-maximizing solution and (b) leads to innovations in the very long run
What is considered in supply at three different levels of aggregation?
- The amount supplied to the economy as a whole - The amount supplied to a particular industry - The amount supplied to a particular firm
What are the assumptions of monopolistic competition
1. Each firm produces its own version of the industry's differentiated product. each firm faces negatively sloped demand curve that is highly elastic because competing firms produce many close substitutes 2. All firms have access to the same technological knowledge and so have the same cost curves 3. The industry contains so many firms that each one ignores the possible reactions of its many competitors when it makes its own price and output decisions. In this respect, firms in monopolistic competition are similar to firms in perfect competition 4. There is freedom of entry and exit in the industry. if profits are being earned by existing firm, new firms have an incentive to enter. When they do, the demand for the industry's product must be shared among the the increased number of firms
What are the characteristics of a Giffen good
1. Good must be an inferior good meaning that a reduction in real income leads households to purchase more of that good. 2. the good must take a large proportion of total household expenditure and therefore have a large income effect
The supply of labour depends on what?
1. Population 2. Labour force participation rates 3. Hours per person worked
what does the price elasticity of demand depends on?
1. The elasticity of demand for the final product 2. The ability to substitute between factors
Formula for Economic profits
=Revenues - (explicit costs + implicit costs) =Accounting Profits - Implicit costs
What is the formula for AP?
=TP/L
Tanisha's income increases from $900 per week to $1,100 per week. As a result, she decides to increase the number of restaurant meals she purchases each month by 10 percent. When it comes to Tanisha's demand for restaurant meals, the ________ elasticity of demand is equal to ________. A) income; 0.5 B) income; -0.5 C) price; 2 D) price; 0.5 E) income; 2
A
Whenever we observe that the slope of the budget line changes, there MUST have been A) a change in the price of at least one good. B) a change in the price of both goods. C) a change in the consumer's preferences. D) None of these could cause a change in the slope of the budget line. E) an increase in the consumer's income.
A
what causes a shift along a demand curve
A change in demand will always be a shift in the entire curve such as the move from point C to point D.
What will cause a shift in the market factor demand curve and why?
A change in the factor's marginal product - Better technology or more units of other factors • A change in the firms marginal revenue- The increase in MR leads to a rightward shift in the factor's MRP curve and thus to an increase in the demand for the factor. • A complication- The market demand curve for any factor of production is less elastic than what would result from a simple horizontal summation of all the firms' demand curves for that factor.
A change in which of these factors would cause a movement along the supply curve for labour rather than a shift of the labour supply curve?
A change in the wage
Which of these factors will not cause the demand curve for labour to shift? A change in human capital A change in technology A change in the price of the product A change in the wage and why?
A change in the wage A change in wage, since wages are the price of labour, is a movement up or down an existing demand curve. Conversely, an increase in human capital or a change in technology both make labour more productive and will shift the demand for labour to the right.
define Bond
A debt instrument carrying a specified amount, a schedule of interest payments, and (usually) a date for redemption of its face value
Define price setter
A firm that faces a downward-sloping demand curve for its products. it chooses which price to set.
define a single proprietorship
A firm that has one owner who is personally responsible for the firm's actions and debts
define a ordinary partnership
A firm that has two or more joint owners, each of whom is personally responsible for the firms's actions and debts
Define Production Function
A functional relation showing the maximum output that can be produced by any given combination of input
Define the term differentiated product
A group of products similar enough to be called the same product but dissimilar enough that they can be sold at different prices.
Define Monopoly
A market containing a single firm
A moral hazard occurs when
A moral hazard occurs when one party to a contract alters their behaviour as a result, and therefore passes more risk to the other party. For example, a person might be more careless while driving after they purchase car insurance since they no longer bear as much risk.
define Cooperative (or collusive) outcome
A situation in which existing firms cooperate to maximize their joint profits
what is the formula for average fixed cost
AFC = TFC / Q
What is for the formula for average revenue
AR = TR/Q = p X Q / Q = p
What is the formula for average total cost
ATC= TC/Q ATC= AFC + AVC
what is the formula to calculate average variable cost
AVC = TVC/Q
Formula for accounting profits
Accounting Profits = Revenues - Explicit costs
Imagine that Alison's utility from the last dollar spent on juice is three time her utility from the last dollar spent on burritos. In this case, what should Alison do? and why?
Alison can increase her total utility by spending less on burritos and spending more on juice This is because if Alison wants to maximize her utility she needs to switch her expenditure from burritos to juice as long as her last dollar spent on juice yields more utility than her last dollar spent on burritos. Switching reduces the quantity of burritos consumed and given the law of diminishing marginal utility, this will raise the marginal utility of burritos consumed and increases the quantity of juice consumed and thereby lowers the marginal utility of juice. Therefore the change creates a point where Alison gains nothing from further switches, as switching further would reduce her total utility.
Explain The Mobility of Land
Although land is highly mobile among alternative uses, it is completely immobile as far as location is concerned.
Define Collusion
An agreement among sellers to act jointly in their common interest. Collusion may be overt or covert, explicit or tacit.
Defined Nash Equilibrium
An equilibrium that results when each player is currently doing the best it can, given the current behavior of the other players
Define a non-cooperative outcome
An industry outcome reached when firms maximize their own profit without cooperating with other firms
If, when you consume another piece of candy, your marginal utility is zero, then A) you should consume less candy. B) you have maximized your total utility from consuming candy. C) you want more candy. D) you have not yet reached the point of diminishing marginal utility. E) you can still have more candy, marginal utility will stay at zero.
B
Goods that are non-rivalrous and excludeable (e.g., roads, museums, and parks) are often provided by government because the marginal cost of provision to society is and why?
zero and so the allocatively efficient price is zero Goods that are excludable but not rivalrous have the characteristic that the marginal cost of providing the good to one extra person is zero. When there is no congestion, the marginal cost to society of providing one more unit of the good is zero, so allocative efficiency requires that the price also be zero. Any positive price would prevent some people from using it, but this would be inefficient.
name for a group of firms that colludes by agreement to restrict output to increases prices and profits and why
Cartel. Cartels band together and exert market power in a way that increases cartel member profits. A duopoly is an oligo of only two firms
What trade-offs do consumers face when buying a product from a monopolistically competitive firm? and why?
Consumers pay a greater price and have more choices. Additionally, monopolistically competitive markets are not as efficient as perfectly competitive markets. Product differentiation is more costly but it affords consumers the ability to buy a product that is more suited to their unique needs.
Consider an excise tax imposed on the suppliers of a good. The incidence (burden) of the tax A) usually falls more on the buyers than the sellers. B) is usually split equally between the buyers and the sellers. C) falls more on the sellers if demand is inelastic. D) falls more on the sellers if demand is elastic. E) usually falls more on the sellers than the buyers.
D
Imagine that you find that there is a positive relationship between two variables. Then, A) two answers are correct: the graph of the relationship will be upward sloping, and the slope of the line graphing the relationship will be negative. B) two answers are correct: the graph of the relationship will be downward sloping, and the slope of the line graphing the relationship will be negative. C) the slope of the line graphing the relationship will be negative. D) the graph of the relationship will be upward sloping. E) the graph of the relationship will be downward sloping.
D
Suppose that a single-price monopoly and a perfectly-competitive industry have the same costs. Compared to the competitive industry, the monopoly produces ________ output and charges ________ price. A) a larger; a lower B) a smaller; the same C) the same; a higher D) a smaller; a higher E) a smaller; a lower
D
Suppose that the income elasticity of demand for a good is equal to -1.6. We would then conclude that A) the good is a luxury good. B) the good is a normal good. C) the good must be a necessity. D) a decrease in income will lead to an increase in demand for the good. E) an increase in income will lead to an increase in demand for the good.
D
What does the sum of consumer surplus and producer surplus equal?
Economic surplus
What is the paradox of value and how can it be solved
Example to explain is water which is essential to life has a low price in comparison to diamonds. This is because the supply of water is plentiful in comparison to diamonds. The paradoc of value can be resolved by understanding (1) the market price of a good depends on both demand and supply, and (2) the difference between the total and marginal value that consumers place on a good. Water has a low price and low marginal value, but a high total value. Diamonds have a high price and high marginal value, but a low total value.
define Factor mobility
Factor mobility is the ease with which a factor of production can move between firms, industries, occupations, or regions. • A factor that shifts easily between uses in response to small changes in incentives is said to be mobile. • A factor that does not shift easily from one use to another, is said to be immobile.
define a multinational enterprises (MNEs)
Firm that have operations in more than one country
define imperfectly competitive
Firms differentiate their products, firms set their prices, firms engage in non-price competition. Example cereal brands, the firm must set their products characteristics
What may be created by network externalities
It may create a barrier to entry for competing technologies due to high switching costs. The cost to switch to a different technology or method may be so high that inferior technology or products continue to be the dominant form simply because they were introduced first
When does Nash equilibrium occur
It occurs during absence of cooperation. If a Nash equilibrium is established by any means whatsoever, no firm has an incentive to depart from it by altering its own behaviour
For natural monopolies, average-cots pricing often leads to what?
It often leads to inefficient long-run investment decisions with too little capital being built
Explain the theory of monopolistic competition
It was made to help explain the behavior and outcomes in industries in which there are many small firms, but each firm has some degree of market power. for example a hair salon has some ability to influence the prices of their products. They could spend money on advertising which they would not do if they were price takers. Nor are these firms selling identical products. Each firm differentiates itself simply by being in a different location, which itself gives some degree of market power.
Define a horizontal merger
It will most likely increase market power. a merger between firms in the same industry. Horizontal mergers are scrutinized by the competition bureau to make sure the post-merger industry is not to concentrated.
For a natural Monopoly with falling average costs, what will a policy of average-costs prices do to allocative efficiency and why
It will not result in allocative efficiency because price exceed marginal cost
When a natural monopoly with falling average costs sets price to marginal cost, what will happen?
It will suffer losses
Why do economists say labour is a derived demand?
Labour demand is derived from the demand for the goods and services workers produce.
what is the formula marginal cost
MC = change in TC and change in Q
What is the formula for MRP
MP x MR
What is the formula for marginal revenue
MR = Change in TR / Change in Q
Let MRP equal the marginal revenue product of labour, P equal the price of the product, and W equal the wage rate. When should a firm hire more workers to increase profit?
MRP > W
Describe an alternative way a consumer can use to maximize their utility. Explain why.
MUx/MUy=Px/Py If the two sides are not equal, the consumber can rearrange her purchases by rearranging her purchases of X and Y. The consumer would not be able to rearrange the right side, but only the left. Which ever has the most MU increase and decrease what has less MU until the equation is equal to each other
Name the condition required for a consumer to be maximizing utility
MUx/Px = MUy/Py
What is the condition for a firm to be maximizing its profits. The firm should hire unit of a variable factor until... ? Who and what does this apply to?
Marginal cost of the factor = Marginal revenue product of the factor (MP x MR) This condition applies to any firm and any factor. However in competitive factor markets the marginal cost of the factor is simply the factor's price
Explain why when the loss in revenue from decreasing price is greater than the gain in revenue from increasing price whenever marginal revenue is negative
Marginal revenue is the change in total revenue associated with producing one more unit. Therefore, if marginal revenue falls it means the loss of revenue from producing that extra unit to outweigh the gain in revenue from selling that unit
Define Monopolistic competition
Market structure of an industry in which there are many firms and freedom of entry and exit but in which each firm has a product somewhat differentiated from the others, giving it some control over its price.
what kind of effect does a monopoly have on a (blank) surplus?
Monopoly causes a reduction in consumer surplus. Consumer surplus is the difference between what a consumer is willing to pay for a good or service and what they actually pay. Given that the price a monopolist charges is typically higher than in a competitive market the consumer surplus will be smaller. However the producer surplus will be larger. Producer surplus is the difference between price and the amount the producer would be willing to accept for the good service.
In what kind of market structure is the firm's demand curve the same as the market demand for the product and why?
Monopoly. The monopolist is the entire market so the demand curve is the same as for the individual firm. That is not the case for industries that have other market structures like perfect competition and monopolistic competition. In those industries, the individual demand curves are very different from the market demand curves
Which type of efficiency is achieved by a monopolistically competitive firm in the long run?
Neither allocative nor productive efficiency
Explain The Mobility of Labour
Non-monetary considerations are much more important for the supply of labour than for other factors of production. - The labour force as a whole is mobile, even though many individual members in it are not.
Define Economic profits
The difference between the revenues received from the sale of output and the and the opportunity cost of the inputs used to make the output. Negative economic profits are called economic losses
Define Consumer Surplus
The difference between total value that consumers place on all units consumed of a product and the payment that they actually make to purchase that amount of the product. " profit " for consumers because they can play less than the maximum amount they are prepared to pay. More specifically, it is the difference between the market price and the maximum price that the consumer is willing to pay to obtain that unit.
Explain Concentration ratio
The fraction of total market sales controlled by a specified number of the industry's largest firms
Define law of diminishing returns
The hypothesis that if increasing quantities of a variable factor are applied to a given quantity of fixed factors, the marginal product of the variable factor will eventually decrease
define marginal cost
The increase in total cost resulting from increasing output by one unit
When a competitive market is in equilibrium, what is the economically efficient level of output?
The level of output where marginal value is equal to marginal cost.
What is the relationship between the long run and monopolistic firms
The long-run restriction comes from free entry into the industry, which permits new firms to compete away the profits being earned by existing firms
Which of these is the equivalent of the demand curve for labour? The firm's total revenue curve The marginal product of labour The firm's profit curve The marginal revenue product curve
The marginal revenue product curve
Which of these is more relevant in determining the wages of baseball players? The educational level of baseball player The total value of baseball games The marginal value of baseball games The cost of living for baseball players
The marginal value of baseball games
What is the definition of economic rent?
The price received by a factor of production that is in fixed supply
Define the excess capacity theorem
The property of long run equilibrium in monopolistic competition that firms produce on the falling portion of their long-run average cost curves. This results in excess capacity measured by the gap between present output and the output that coincides with minimum average cost. (selling more even if it reduces cost will reduce revenue by more than it would reduce cost)
When we talk about property rights in the discussion of externalities, which rights do we refer to?
The rights of individuals to have exclusive use of their property . This includes the right to buy and sell the property. Pollution tends to impact other persons or society overall, so in most cases is illegal and not a right that exists for most property holders.
Define Utility
The satisfaction that a consumer receives from consuming some good or service
What is the relationship between the short run and monopolistic firms
The short-run restriction comes from the presence of similar products sold by many competing firms; this causes the demand curve faced by each firm to be very elastic
define game theory
The theory that studies decision making in situations in which one player anticipates the reactions of other players to its own actions
define Total cost
The total cost of producing any given level of output; it can be divided into total fixed cost and total variable cost
What is the law of diminishing marginal utility?
The utility that any consumer derives from successive units of a particular product consumed over some period of time diminishes as total consumption of the product increases (holding constant the consumption of all other products)
For market equilibrium to generate the largest possible surplus and thus be efficient, which conditions must be met?
We must have perfect competition.
define compensating differential.
When an employer pays a higher wage to compensate workers for unpleasant aspects of their jobs, the employer is offering a compensating differential.
When is output lower than the efficient level (natural mono. ch12) and why
When marginal value is greater than marginal cost Producers can still produce and sell additional units until production costs increase to the point where marginal benefit is equal to marginal cost. If the reverse is true, that is when marginal cost is greater than marginal benefit, then production will be higher than the efficient level.
When is output higher than the efficient level?
When marginal value is less than marginal cost
How does a natural monopoly happen? and why?
When the average total cost curve is decreasing. Some industries can have significant economies of scale and are therefore better served by a monopolist since the average total cost will continue to decline as output increases. In this case, one firm can supply the entire market at a cost that is lower than it would be if two or more firms served the market. Natural Monopoly is most likely to occur in markets where fixed costs are large relative to variable costs
What kind of profit can the monopolist earn in the long run and why
Zero or positive economic profit. Because of the barrier to entry, a monopolist can earn positive economic profit and not have new firms enter the market to compete away those profits. And in the long run the monopolist will not operate at an economic loss but instead choose to shut down.
What causes a movement along the demand curve?
a change in the price of the good A change in quantity demanded is a movement along an existing curve such as a move from point C to point A.
Government is more likely to approve inefficient projects when:
a few people share the benefit from a project and a large number of people share the cost This is the outcome of decisions when a special interest group manipulates the government at the expense of a larger group (taxpayers). Since the cost to any one taxpayer is minor and not worth vocal opposition, it is common for this type of inefficient project to be approved. When the costs are high to a small group, they are much more likely to be vocally opposed and stall inefficient legislation that will be costly to them.
define a corporation
a firm that has legal existence separate from that of the owners
define a state-owned enterprise
a firm that is owned by the government. In canada these are called crown corporations
define Monopolist
a firm that is the only seller in a market
Define long run
a period of time in which all inputs may be varied, but the existing technology of production cannot be changed
Define short run
a period of time in which the quantity of some inputs cannot be changed
What is the basic prediction of demand theory
a rise in price of a product (with all other determinants of demand held constant) leads each utility-maximizing consumer to reduce the quantity demanded of the product
How does a consumer maximize their utility
a utility-maximizing consumer allocates expenditures so that the marginal utility from the last dollar spent on each product is equal
Markets with unequal access to information between buyers and sellers can lead to a situation where only low-quality goods dominate in a given market. This is known as:
adverse selection If buyers cannot distinguish between a low-quality good and a high-quality good, the tendency will be for only low-quality goods to remain in the market over time since buyers will be unwilling to pay higher prices for higher-quality that cannot be easily determined until after the purchase.
The domination of the used-car market by lemons is an example of a market in which the goods left in the market are the undesirable goods. This problem is called:
adverse selection Sellers might not fully disclose all the car's defects in order to receive a higher price. Buyers do not have access to the same information, which puts them at a disadvantage, so buyers are unwilling to pay for the higher quality since they cannot detect it. Over time, only low-quality cars will remain in this market since the higher-quality cars will not bring the desired premium.
What are some ways firms engage in non-price competition
advertising, product quality, entry barriers
define total fixed cost
all costs of production that do not vary with the level of output
define ceteris paribus
all other things being equal
define intermediate products
all outputs that are used as inputs by other producers in a further stage of production
The "informal defence" of free markets is not specifically based on the idea
allocative efficiency, and thus applies to market structures other than just perfect competition. The "informal defence" of free markets is based on three central arguments: 1. Free markets provide automatic coordination of the actions of decentralized decision makers. 2. The pursuit of profits, which is central to free markets, provides a stimulus to innovation and economic growth. 3. Free markets permit a decentralization of economic power.
define a giffen good
an inferior good for which the income effect outweighs the substitution effect so that the demand curve is positively sloped
Define variable factors
an input whose quantity can be changed over the time period under consideration
Define Fixed Factors
an input whose quantity cannot be changed in the short run
If an auto mechanic tells you that your car needs a new transmission, there is the possibility of market failure in the form of
asymmetric information
Pearl buys dog food for her dog, Appa. Holding all else constant, if the price of dog food falls, then Pearl's budget line will A) rotate inward and its slope will change. B) rotate outward and its slope will change. C) shift outward and its slope will not change. D) shift inward and its slope will not change. E) both rotate and shift outward.
b
Suppose that a single-price monopoly is able to sell two units for $8.50 per unit, but in order to sell three units, the price must drop to $8.00 per unit. What is the marginal revenue from selling the third unit? A) $6.50 B) $7.00 C) $8.50 D) $24.00 E) $8.00
b
What happens by putting the income and substitution effect together
because of the combined operation of the income and substitution effects, the demand curve of any normal good will be negatively sloped. A fall in price will increase the quantity demanded
The term Capital can be referred to
both money and quantity of goods
Social benefit is the total benefit from the consumption of a good or service that includes:
both private and external benefits Social benefits include the private benefits that accrue to the parties involved in a transaction but also the benefits to society overall, the external benefits. For example, one external benefit to your college education is the additional taxes you will pay over your lifetime to support public goods.
The factors of production include land, labour, and:
capital
what is the formula for MP
change in TP/ Change in Labour
An agreement among firms to charge the same price or to otherwise not compete is:
collusion
A good that is rivalrous and non-excludeable (e.g., fish in the ocean, or common grazing land) is known as a
common-property resource and tends to be overused by private firms and consumers .
Name a second case of positively sloped demand curves? Describe and give an example
conspicuous consumption goods Products that have "snob appeal" this is when a consumer purchases a product because they are at a high price, such as a very expensive handbag
If labour demand is unchanged, an increase in the labour supply will __________ the equilibrium wage and __________ the number of workers employed.
decrease; increase
If the labour demand is unchanged, an increase in the labour supply will __________ the equilibrium wage and __________ the number of workers employed. And why?
decrease; increase The increase in labour supply will be a rightward shift in the supply curve that results in lower wages (price of labour) and more units of labour employed.
As the number of workers increases, the marginal product of labour __________ and the marginal revenue product of labour __________.
decreases; decreases
The decline in an asset's value over a period of time is known as: reduction reinvesting divestment depreciation
depreciation
The monopolistically competitive firm sells a __________ product and faces a __________ demand curve.
differentiated; downward-sloping
As the wage increases, the demand for labour curve does what and why?
does not shift, but the quantity demanded for labour decreases A change in the price of labour is a movement along an existing demand curve. If wages increase, it is a movement up the existing demand curve that will result in a decrease in the quantity demanded for labour.
what happens if a duopoly cooperates with each other
each firm produces one-half of the monopoly output and each earns large profits
. An economic outcome is allocatively efficient when marginal social cost and marginal social benefit are
equal
Suppose the government were to discover a long-run, formal conspiracy to fix the price of marine hose. This type of collusion would be considered:
explicit collusion
Competitive firm's demand curve for a factor is given by what
factor's MRP curve.
define a non-profit organizations
firms that provide goods and services with the objective of just covering their costs. These are often called NGOS, for non-governmental organizations
debt
funds borrowed from creditors
equity
funds provided by the owners of the firm
An oligopoly is a market structure with and why
high barriers to entry and exit Barriers to entry include anything that keeps new firms from being able to enter the market. These can be anything from ownership of a key input, patent protection, or occupational licensing.
what does the MRP curve show
how many units of the factor will be hired at different factor prices
define Real Income
income expressed in terms of the purchasing power of money income - that is, the quantity of good and services that can be purchased with the money income
If you smoke a cigarette and blow the smoke into others' faces, you are imposing a cost on those into whose faces you blow cigarette smoke, who are third parties to your cigarette smoking what is the relation to social and private marginal costs?
marginal cost is greater than private marginal costs
At the equilibrium, the price of capital is equal to the what and why?
marginal revenue product of capital The marginal revenue product of capital is the change in total revenue that a firm gets from adding one more unit of capital. A firm can always increase profits if the price of capital is less than the marginal revenue product of capital, so it will add units of capital until diminishing returns equate the price of capital the marginal revenue product of capital
A situation in which the free market, in the absence of government intervention, fails to achieve allocative efficiency is called
market failure
When either too few or too many economic resources are flowing to a specific economic activity it is known as:
market failure For example, a heavy manufacturing facility may be polluting the river and the downstream population is bearing this cost. This is one example of a market failure. Government intervention is necessary in this type of market failure.
Four situations in which the free market fails to achieve complete allocative efficiency include
market power, externalities, non-rivalrous and nonexcludeable goods, and asymmetric information.
Define a vertical merger
mergers between firms in the same supply chain. for example an automaker may merge with a tire manufacturer. these do not impact market power
define a conglomerate merger
mergers between two completely unrelated firms and therefore, do not impact market concentration or power
Suppose that market research reveals that the dairy manufacturing industry in Canada had a four-firm concentration ratio of 34 percent. This implies that the dairy manufacturing industry is: a market in perfect competition an oligopoly market not an oligopoly market a monopoly
not an oligopoly market
When no one owns a specific resource, there is:
not enough incentive to consider negative externalities that impact that resource For example, since no one owns the air, and the impact of one individual is minimal, there is no real reason to not pollute if it increases a person's marginal benefit. However, if all behave that way then the issue is magnified. Negative externalities are most often associated with resources that do not have defined private property rights. previous
Moral hazard exists when
one party to a transaction has both the incentive and the ability to shift costs onto the other party.
In some cases, the full cost of production is borne by someone other than the producer and the consumer. This will result in:
overproduction at a lower price when compared to the social efficient outcome Since someone else is bearing some of the costs, the producers will continue to produce more units until the marginal costs they bear are equal to the marginal benefits they receive. This will result in the commitment of too many economic resources to the production of this product.
What is the profit-maximizing output formula
pi = TR-TC
If a monopolistically competitive firm's demand curve is above its average total cost curve, then this firm is making:
positive economic profit
A good or service that is rivalrous and excludeable (e.g., a restaurant meal or a sofa) is known as a
private good and is most efficiently provided by the free market
Costs that are only borne by the individuals that incur those costs are known as:
private costs These costs are also called internal costs because they only involve the parties involved in the transaction. When transactions only involve private costs and benefits, there are no externalities.
define dividends
profits paid out to shareholders of a corporation
The lack of clearly assigned __________ contributes to __________ of common resources.
property rights; overuse For example, if someone cuts a tree for firewood on public land they gain a lot of benefit while the cost is spread over many other persons.
Goods and services that are non-rivalrous and non-excludeable (e.g., national defence, a lighthouse) are known as
public goods Private markets will not provide these goods or services because of the free-rider problem.
During the Great Recession in Canada (2008-2009), there were very few employment opportunities for investment bankers, stockbrokers, and other financial workers since the collapse of financial markets. Many Canadians who worked in the financial services sector in Canada left this industry causing the labour supply curve to:
shift to the left
As technology improves, the demand for labour curve to what? and why?
shifts to the right A change in technology makes workers more productive. Over time, firms will be willing to add more units of the more productive workers and the demand curve for labour will shift to the right. Since technology lowers the cost of production, it makes firms willing to produce more because profits are higher.
As the price of the final product increases, the demand for labour curve does what and why?
shifts to the right A higher price means the marginal revenue product of labour will increase, ceteris paribus (all other things being equal). Therefore, the firm will be willing to hire additional workers until it reaches the point where the marginal revenue product of labour is equal to the cost of hiring the next worker.
Explain the theory of oligopoly
small number of large firms, each with considerable market power, and that compete actively with each other. Examples include grocery stores, life insurance, Canadian airline.
How do you calculate how many workers should the firm hire to maximize profit?
step one = calculate MRP (Calculate change in total revenue for each additional worker) step two = identify wage rate step three = calculate difference between MRP and wage rage Step four = does additional profits turn negative or positive?
When congestion occurs on roads and bridges, or in art galleries and museums,
t is no longer true that the marginal cost of providing the good to one more user is zero. By increasing the amount of congestion, providing the good to one more person imposes costs on those already using the good. A good that is non-rivalrous when uncongested becomes rivalrous when congested. At this point, it becomes (in economic terms) a private good, and a positive price is appropriate. Governments that provide such goods often charge a price to help ration the good when rivalry becomes significant.
An externality occurs whenever actions
taken by firms or consumers directly impose costs or confer benefits on others. If there is a divergence between private marginal cost and social marginal cost, then we can say that externalities are present.
Asymmetric information means
that either buyers or sellers have better information than the other in a given market
Allocative efficiency requires
that the price also be zero. Any positive price, which a private firm would have to charge, would reduce consumption below the amount at which marginal benefit would be zero, but this would be inefficient.
define marginal product (mp)
the change in total output that results from using one more unit of a variable factor. Mp of a variable factor is the additional output that results from the use of one additional unit of that factor.
Define total utility
the consumers total satisfaction resulting from the consumption of a given product
Private cost measures
the cost faced by the private producer, including production costs, advertising costs, and so on.
In the broadest sense, game theory studies the decisions of firms in industries where the profits of each firm depend on:
the firm's interactions with other firms
Demand curves for inferior goods are negatively slopped unless?
the income effects outweighs the substitution effect
A profit- maximizing firm will hire a factor until when?
the marginal cost of the factor is equal to its marginal revenue product. Marginal cost of the factor = Marginal revenue product of the factor These conditions are true under conditions of perfect competition, Monopolistic competition, oligopoly, or monopoly
Financial markets refer to
the markets where financial assets such as stocks and bonds are bought and sold. In the simplest version of the circular flow model, financial markets are not shown.
Social cost includes
the private cost (since the producer is a member of society) but also includes any other costs imposed on third parties.
Strong property rights for intellectual property and information goods are important since:
the profit motive incentivizes innovation
A negative externality causes:
the social cost of production to be greater than the private cost social costs are the full cost to society due to the use of a resource. For example, a heavy manufacturing process costs in terms of labour and raw materials, but also in lower air and water quality costs that are borne by third parties. Social costs include all those costs which, in the case of a polluting industry, exceed the private costs.
The tendency for common resources to be overused is known as:
the tragedy of the commons When common property is available for everyone to use with no restraints, there is an individual incentive to overuse the resource even though there are external costs being borne by others. When enough people behave in this manner, it can destroy the resource.
In imperfect competition. most firms set their prices, then how are sales determined
then let demand determine sale. Changes in market conditions are signaled to the firm by changes in the firms sales
If a potato chip plant is operating beside a residential neighbourhood and produces noise and an unpleasant odour, the potato chip plant's operation imposes costs on people living in the neighbourhood what is the relation of marginal private and marginal social costs?
therefore, the marginal social cost of producing potato chips is greater the marginal private cost of producing potato chips. So, there is negative externality. With a negative externality, a competitive free market will produce too much of the good. Therefore, in this case, the free market is producing too many potato chips.
Externalities arise in many different ways,
they may be harmful or beneficial to the third parties. When they are harmful, they are called negative externalities; when they are beneficial, they are called positive externalities. A positive externality is present if private marginal benefits are less than social marginal benefits.
Monopolistically competitive firms have some control over price because:
they sell differentiated products
The term free markets merely refers
to a markets with little or no government intervention.
Factor markets refer
to the collection of markets where factors of production (land, labour, and capital) are bought and sold.
define a duopoly
two-firm oligopoly
Utility can be measured using what units?
utils
When is output lower than the efficient level?
when the marginal benefit is greater than the marginal cost
When marginal benefit is less than marginal cost, what should you do and why?
you should reduce output until you reach the point where marginal benefit is equal to marginal cost. The point where marginal benefit is equal to marginal cost is the most efficient level of output since you maximize your overall utility at this point.
Define Strategic behavior
Behavior designed to take account of reaction of the reaction of one's rival to one's own behavior
Assume that you are a farmer and you are contemplating hiring another worker to harvest apples. When one additional worker is hired, total product increases from 100 to 110 units of output per month. Marginal product must therefore be A) constant. B) decreasing. C) positive. D) zero. E) increasing.
C
Suppose that a firm producing roller skates is operating at a level where marginal costs are higher than average costs. If the firm produces one more set of roller skates, average costs will A) reach their maximum. B) reach a point of diminishing returns. C) rise. D) remain constant. E) fall.
C
When a perfectly competitive firm is producing at its profit-maximizing level of output, it A) is producing where P = AVC. B) is producing where MC = ATC. C) may be making a profit or incurring a loss. D) is producing where price exceeds marginal cost. E) is doing as well as it can and is making a profit.
C
Which of the following statements is true for both a monopoly and a perfectly competitive firm? A) None of these. B) Each sets a price for its product that will maximize its revenue. C) Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost. D) Each must lower its price to sell more output. E) Each maximizes profits by producing a quantity for which price equals marginal cost.
C
Economic decisions are made at every level in society. When we try to decide which production method to use among several alternatives, which of the following key economic questions are we trying to answer? How do we produce the products? Who consumes the products? What products do we produce? What products are consumed?
How do we produce the products? There are typically multiple ways that we can combine factors of production to achieve a particular outcome. For example, you can produce electricity with solar power, hydroelectric generators, coal-fired plants, and other means. The power company will answer this question given their various constraints. Two other key economic questions deal with determining what to produce and who consumes the products or services. Tradeoffs exist on both the production and the consumption side since we all have scarce resources. A market economy will allow the free market to make these decisions and a central planning or command economy will make these decisions via a government agency. In both cases, the questions are answered with different levels of efficiency.
product markets
In the circular flow model, product markets refer to markets where goods, such as computers, or services, such as medical treatment, are offered.
What is total consumer surplus
It is the area under the demand curve and above the price line
What is the market demand like for conspicuous consumption?
It is unlikely for it to be positively sloped because countless lower income consumers would be glad to buy luxury handbags or cars . Their behavior would likely offset the behavior of the few higher income "snobs"
what are private and social benefits?
Private benefit measures the benefits received by the consumer from using the product, however intangible those benefits may be. Social benefit includes the private benefits plus whatever benefits accrue to third parties.
a possible solution to the tragedy of the commons?
Privatize the common property the common property is transferred to private property, the individual ownership will ensure the property is taken care of properly. The new owner may limit the use by quotas or charge an admission price sufficient to limit the number of people using the resource. Signs have limited impact on behaviour unless penalties are attached and constant monitoring occurs.
What makes Monopolistic competition different from perfect competition
Product differentiation is the only thing
What is the functional notation and explain
Q = f(K, L), Q is the flow of output, K is the flow of capital services and L is the flow of labour
Explain the market structure of an oligopoly
Small number of interdependent firms compete. A good example of an industry that is an oligopoly is the automobile industry which is dominated by a few large interdependent firms.
Explain The Mobility of Capital
Some kinds of capital equipment—lathes, trucks, and computers —can be easily shifted among firms, industries, and across different regions of the country. • These are considered mobile capital. • But some kinds of capital are quite immobile. Consider plants and machinery that are built for a specific purposes and are difficult to modify for other purposes.
Derived Demand
The demand for a factor of production that results from the demand for the products that it is used to make; it is the demand for a factor of production is said to be a derived demand
Assume the cost of aluminum used by soft-drink companies increases. Which of the following statements correctly describes the resulting effects in the market for canned soft drinks? The demand for soft drinks decreases The quantity of soft drinks demanded decreases The supply of soft drinks decreases The quantity of soft drinks supplied decreases and why
Statements 1 and 3 are correct. If the cost of aluminum used by soft-drink companies increases it will result in a decrease in the supply of soft drinks and reduce the quantity of soft drinks demanded since the price will increase. When the price of aluminum increases, it increases the cost of producing canned soft drinks and shifts the supply curve to the left. This results in a change in supply and a movement along the demand curve. Remember that any change in quantity supplied is simply a movement up or down an existing supply curve and due only to a change in price. The same is true for a change in quantity demanded. It is a movement up or down an existing demand curve and due only to a change in product price. Only a change in something other than product price can cause a shift in supply or demand.
What kind of choices do oligopolistic firms make
Strategic choices; they consider how their rivals are likely to respond to their own actions
What is w = MP x P
Suppose labour is available to the firm at the cost of $10 per hour (w=$10) Suppose also that employing another hour of labour adds 3 units to output (MP=3) and that any amount of output can be sold at a market price of $5. Thus the additional hour of labour adds to $15 to the firm's revenue but only $10 to its costs. In this case, the firm will increase profits by hiring more hours of labour. The firm will stop hiring additional labour only when the marginal cost of hiring (w) is equal to the marginal revenue product (MP x p). This is in order to maximize its profits, any firm must hire each factor of production to the point where the factor's marginal revenue product just equals the factor's price.
what is the total cost formula
TC = TFC + TVC
what is the formula for total revenue
TR = p X Q
The Monopolist produces an output that is (blank) the perfectly competitive industry would produce and why?
The Monopolist produces an output that is less than the perfectly competitive industry would produce. In perfect competition, the firms output will be at the point where marginal revenue equals marginal cost equals price. However for a monopolist to maximize profits, production will be lower and price will be higher. The deadweight loss to society will be higher for the monopoly profits, production will be lower and price will be higher. The deadweight loss to society will be higher for the monopoly than it would be in a competitive market but the monopolist will maximize profits at this level
Define marginal utility
The additional satisfaction gained from consuming one additional unit of a product
Define Substitution effect
The change in the quantity of a product demanded resulting from a change in its relative price (holding real income constant) And/or The substitution effect increases the quantity demanded of a product whose price has fallen and reduces the quantity demanded of a product whose price has risen
Define Income effect
The change in the quantity of a product demanded resulting from a change in real income (holding relative prices constant) and/or The income effect leads consumers to buy more of a product whose price has fallen, provided that the product is a normal good
What main problem is there for concentration ratios
There are troubles with defining the market with accuracy because a market can be much smaller than the whole country. for example, concentration ratios in national cement sales are low, but they understate the market power of cement companies because high transportation costs divide the cement industry into series of regional markets, with each having relatively few firms. Or, The market may be larger than one country (international traded commodities) a firm can account for almost 70 percent of Canadian sales, but their power in the global market is practically nil
What were to happen if suppose the demand curve cuts its LRAC curve?
There would then be a range of output over which positive profits could be earned. Such profits would lead firms to enter the industry, and this entry would shift the demand curve for each existing firm to the left until it is just tangent to the LRAC curve, where each firm earns zero profit
What were to happen if suppose the demand curve for each firm lies below and never touches its LRAC curve?
There would then be no output at which costs could be covered, and firms would leave the industry. With fewer firms to share the industry's demand, the demand curve for each remaining firms will shift tot the right. Exit will continue until the demand curve for each remaining firm touches and is tangent to its LRAC curve
what happens if a duopoly competes with each other
They each produce more than half (say two-thirds) of the monopoly output and in this case both firms earn low profits
How do imperfectly competitive firms often respond to fluctuations in demand and why?
They often respond by changing output and holding prices constant, if demand changes are expected to persist will firms adjust their entire list of prices. This is because they would have to change a long list of prices is costly enough, on top of that include printing new list prices and notifying all customers, the difficulty of keeping track of frequently changing prices for accounting purposes and the loss of customer and retailer goodwill caused by frequent price changes.
define Total product (tp)
Total amount produced by a firms during some period
define total variable cost
Total costs of production that vary directly with the level of output
define average total cost
Total fixed cost divided by the number of units of output
define average product
Total product divided by the number of units of the variable factor used in its production
define average variable cost
Total variable cost divided by the number of unit of output
Increases in labour productivity cause the demand for labour curve to __________, which leads to __________ in the equilibrium wage, and __________ in the equilibrium number of workers employed. and why?
increase; an increase; an increase An increase in the productivity of labour increases the marginal revenue product of labour and makes firms willing to hire more units of labour. This is represented by a rightward shift in the demand for labour curve which will result in a higher wage and more units of labour demanded.
Define Marginal revenue Product (MRP)
is the extra revenue that results from using one more unit of a variable factor
In the short run, how is monopolistically similar to a monopoly.
it faces a negatively sloped demand curve and maximizes its profits by choosing its level of output that marginal costs equal marginal revenue.
What is the most striking contrast between perfectly competitive markets and markets for differentiated products
it is the behavior of prices. In perfect competition, prices change continually in response to changes in demand and supply, but for differentiated products prices change less frequently
What does it mean when a large firm has a low concentration ratio?
it suggest that they have quite limited market power
As the chance of getting a low-quality goods increases, buyers are willing to pay __________ for a used car and the quantity of high-quality cars will tend to __________.
less; fall resulting in a so-called thin market. This problem is called adverse selection
A monopolistically competitive firm is characterized by the existence of many firms in the market, differentiated products, and: perfect information high barriers to entry very few customers low barriers to entry and why?
low barriers to entry Firms compete for a large number of buyers by producing products that provide the same good or service but are differentiated in some way. For example, look at all the different types of shampoo that are all slightly different yet all perform the same function. At any time, a new shampoo manufacturer could easily enter this market because there are low barriers to entry.
